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How e-commerce firms will gain in the GST regime

LiveMint 17-05-2017Gireesh Chandra Prasad

New Delhi: E-commerce companies such as Amazon Seller Services Pvt. Ltd and Flipkart Ltd are set to be among the winners in the transition to a single national market which will be created by the proposed goods and service tax (GST).

GST should put an end to the numerous hurdles state administrations have been erecting amid complaints that online sales, and the hefty discounts they come with, are eroding the sales and profitability of physical retailers as well as state revenues.

It will mean a shift from the current model of taxing inter-state transactions, where the manufacturing state gets the proceeds of a 2% central sales tax on goods sold in other states. This will make way for a system in which the consuming state will get proceeds of taxes on interstate supply of goods. The integrated GST, which applies to inter-state supplies, has central and state components of roughly equal measure.

“We believe GST is good for the e-commerce industry as it would eliminate hurdles in inter-state delivery and subsume the entry tax introduced on e-commerce shipments by some states,” an Amazon India spokesperson said. Flipkart did not immediately respond to a request for comment.

GST, being a ‘destination-based tax on consumption’, is also set to address concerns of state governments that the business models of e-commerce firms erode their tax base.

Getting hassle-free access to markets across the country will benefit the e-commerce sector which, according to a January 2017 report by industry lobby group Associated Chambers of Commerce and Industry of India, is expected to touch $17.52 billion in turnover by the end of 2018.

E-commerce firms achieve efficiency by building warehouses in a few states where merchandise is stored for selling to consumers across the country. These companies typically offer the service of an online marketplace, and in some cases a warehousing facility to vendors, and pay service tax to the central government on any fee or margin received for that. The liability of value-added tax (VAT) to be paid to the state government at the business-to-consumer level is on the vendor.

The Karnataka government had in 2015 asked e-commerce firms to take the responsibility of paying VAT for the sales made by third-party vendors on their platform, leading to litigation between the state and firms such as Amazon.

Experts said that e-commerce firms being asked to provide details of sales by vendors on their platforms was fair, but holding them liable for VAT payment was not.

E-tailers work on thin margins of 3-4%. If they are forced to pay VAT at 14.5% on the product’s value, it won’t work, said an expert who asked not to be named.

“In the GST regime, the vendor has to pay GST and instances of holding e-commerce companies responsible for vendors’ tax payment will come down. In general, GST introduction is good for e-commerce companies as GST is a destination-based tax on consumption, unlike central sales tax on inter-state sale of goods which is origin-based,” said Pratik Jain, leader, indirect tax, PricewaterhouseCoopers India.

Online retailers face one potential irritant in GST—a 1% tax collected at source from vendors and paid to the government. “Vendors will get full tax credit on this 1% tax, but it could cause administrative inconvenience to e-commerce firms when products are returned by the consumer,” said R. Muralidharan, senior director, Deloitte in India.